Disaster Risk Financing: Limiting the Fiscal Cost of Climate-Related Disasters

Climate-related disasters have affected most EU Member States, even if unevenly, due to their different geographic situation and GDP levels. Consensus is emerging that disaster risk financing strategies can be a useful tool to manage and limit the fiscal cost of disasters. This is all the more relevant when the State acts as disaster insurer of last resort, a situation that provides little incentive to individuals to purchase insurance, leading to moral hazard. This paper presents evidence on the main elements of national disaster risk financing strategies. It starts with evidence on quantifying and disclosing disaster-related fiscal risks. It provides evidence on private disaster insurance, a risk-sharing instrument, as a complement to the public sector financial involvement in disaster relief, recovery and reconstruction. The explicit and implicit role of the public sector after disasters is reflected in the national budgetary arrangements and available public insurance schemes. Finally, the rules on the beneficiaries and eligibility for public compensation and provisions for transparency and monitoring enhance the national set-up for disaster financing.